Although HMRC refer to taxpayers as customers, and thereby suggest a degree of customer service, in the real world this rarely extends to offering “customers” pro-active tax advice.
Historically, tax collectors are trained to maximise the assessment and collection of tax. Consequently, tax payers should be wary, they should check the tax statements that are delivered in brown envelopes and make sure that they have taken advantage of reliefs and allowances available to them.
Take for instance the personal tax allowance. Not much to go wrong here you might think. For 2016-17 your personal tax allowance amounts to £11,000 and this amount will be deducted from your taxable income before any calculation of taxes due is made; or will it?
Three planning issues for 2016-17 come to mind:
- Will your total income be under £11,000? Consider Peter and Jane. They are married, Peter’s income is below £11,000 and Jane is a basic rate, not a higher rate taxpayer. Peter could transfer up to £1,100 of any unused personal allowance to Jane. This would save Jane £220. HMRC are aware of Peter and Jane’s earnings and yet they require the couple to make an election and claim the relief. Which is fine if Peter and Jane are aware of the relief. HMRC are apparently surprised that a large number of couples who could claim the relief do not.
- If you are in business, there is a very generous allowance you can claim if you buy qualifying commercial vehicles or equipment. Since 1 January 2016, you can deduct the full costs up to £200,000. If you are self-employed there is a danger that claims such as this Annual Investment Allowance (AIA) could reduce your taxable income below the £11,000 personal allowance threshold. If this occurs, any unused personal allowance is lost – it cannot be carried forwards and claimed in the next tax year. What you could do is restrict your claim for the AIA such that your taxable income equals £11,000 and your personal allowance would be fully utilised. Any balance of capital expenditure could be carried forward and used in future years.
- If your income exceeds £100,000 you will lose your entitlement to claim the personal allowance at the rate of £1 lost for every £2 your income exceeds £100,000. This means that when your income for 2016-17 exceeds £122,000 you can no longer claim the £11,000 deduction. Readers who have an interest in numbers will be interested to know that income is taxed at a marginal rate of 60% in this £100,000 to £122,000 band. Tax payers heading for this outcome can take steps to reduce their earnings below the £100,000 trigger point, but HMRC will not advise you on the steps you could take.
The UK has one of the most complex tax codes and many tax payers run the risk of paying too much tax just because they are not aware of the allowances and strategies they could employ to minimise their expose to taxation. We are not suggesting any form of avoidance activity, we are only suggesting that you claim your full entitlement to allowances and reliefs that are available to you. Of course, we would be delighted to be part of the process – call any time for a consultation.
The title of this posting describes an important concept when considering claims for expenditure to reduce our tax bills.
By and large, HMRC will accept claims that have been expended wholly and exclusively for the purposes of running a business or fulfilling your employment obligations. But what does this phrase actually mean?
Certainly, if you are making claims based on your employment: subscriptions to professional bodies, travel costs, the cost of uniforms, all of which you have paid for, may qualify for a claim. Pound for pound these expenses will reduce your income subject to tax and your tax liabilities.
Obviously, if your employer or business has met the costs, you cannot make a further claim.
There are certain categories of expenditure that can be recovered in this way. For the self-employed they include:
- office costs, e.g. stationery or phone bills
- travel costs, e.g. fuel, parking, train or bus fares
- clothing expenses, e.g. uniforms
- staff costs, e.g. salaries or subcontractor costs
- things you buy to sell on, e.g. stock or raw materials
- financial costs, e.g. insurance or bank charges
- costs of your business premises, e.g. heating, lighting, business rates
- advertising or marketing, e.g. website costs
The test you need to apply is always: is the expenditure incurred wholly and exclusively for the purpose of your trade or employment.
HMRC recently published a list of the more outlandish claims they received as part of the 2014-15 tax returns. They included:
- Holiday flights to the Caribbean
- Luxury watches as Christmas gifts for staff – from a company with no employees
- International flights for dental treatment ahead of business meetings
- Pet food for a Shih Tzu ‘guard dog’
- Armani jeans as protective clothing for painter and decorator
- Cost of regular Friday night ‘bonding sessions’ – running into thousands of pounds.
- Underwear – for personal use
- A garden shed for private use – plus the costs of the space it takes up in the garden
- Betting slips
- Caravan rental for the Easter weekend.
Readers who are uncertain if the costs they have incurred can be included in their business accounts, or claimed by employees on their tax return, should call for advice. Although the wholly and exclusively rule applies in most cases, there are situations where the “exclusivity” part can be more of a grey area, for example where there is business and a private use element.
We have advised readers in previous postings that HMRC seem to be intent on digitising the upload of small business accounting data from April 2018. From this date, affected self-employed traders (including landlords) will be required to upload details of their trading activities on a quarterly basis.
On the 31 January, HMRC responded to the consultation with interested parties regarding the way in which the MTD process will work in practice.
Many of the initial features remain unchanged:
- The self-employed will be required to file from April 2018.
- The lower income limit above which filing will be compulsory remains at £10,000 – although we are likely to see an increase in this figure when the legislation enacting MTD is published in the Finance Bill March 2017.
- Traders will need to keep their accounting records in a format that can be uploaded to HMRC. Hopefully, spreadsheet templates and other small business software will be available, but traders will need to ensure that they are organised and ready to comply by the April 2018 start date.
Once the MTD process is activated, the need to file a self-assessment tax return each year will be discontinued. It will be replaced by the four quarterly uploads and an annual final check to ensure that all relevant reliefs and adjustments to accounts data are in place.
This is a huge change in the reporting of information to HMRC. As the April 2018 date approaches we will be working with clients to ensure they are fit for purpose. More than 600 accounting software providers are working with HMRC to ensure that their software will accommodate the uploads to HMRC.
Clients who are concerned by this change and want advice on the implications for their business are welcome to call for an update. Please bear in mind, that until we see formal legislation on this topic later in the year the precise details of who is affected, and how the upload process will work in practice, are still uncertain. What seems to the case, is that we have moved a step closer to Making Tax Digital.
HMRC have the following advice to offer:
“You may be able to claim tax relief if you have to use your own money for travel or things that you must buy for your job. You must have paid tax in the year you spent the money. How much you can claim depends on the rate you pay tax.
You can only claim relief on things that are used just for your work, and which you don’t use in your private life.
You can’t claim relief on things you’ve spent money on if your employer has already provided you with an alternative.
You must keep records of what you’ve spent, and claim within 4 years of the end of the tax year that you spent the money. If your employer has paid back your expenses, you can’t claim tax relief.”
Expenses that you may incur and that you can claim back include:
- Uniforms, work clothing and tools.
- A mileage allowance for the use of your own car on business trips (but not home to work mileage).
- If you have a company car but you have incurred running costs that your employer has not reimbursed, then you may be able to make a claim.
- You may be able to reclaim business travel expenses that have not been reimbursed. For example:
- Public transport
- Hotel accommodation
- Food and drink
- Congestion charges and tolls
- Parking fees
- Business phone calls
- You may also be able to claim for the cost of approved professional fees and subscriptions.
This is by no means an exhaustive list. And if you feel that you may have a claim we would be happy to advise.
HMRC seem to be developing a sense of humour. This is a list of failed claims for expenses that they recently published on their website:
1 February 2017 – Due date for corporation tax payable for the year ended 30 April 2016.
19 February 2017 – PAYE and NIC deductions due for month ended 5 February 2017. (If you pay your tax electronically the due date is 22 February 2017)
19 February 2017 – Filing deadline for the CIS300 monthly return for the month ended 5 February 2017.
19 February 2017 – CIS tax deducted for the month ended 5 February 2017 is payable by today.
1 March 2017 – Due date for corporation tax due for the year ended 31 May 2016.
2 March 2017 – Self assessment tax for 2015/16 paid after this date will incur a 5% surcharge.
19 March 2017 – PAYE and NIC deductions due for month ended 5 March 2017. (If you pay your tax electronically the due date is 22 March 2017)
19 March 2017 – Filing deadline for the CIS300 monthly return for the month ended 5 March 2017.
19 March 2017 – CIS tax deducted for the month ended 5 March 2017 is payable by today.
The end of January, self-assessment filing deadline, and the approaching tax year end seem to stimulate fraudulent activity focussing on tax issues.
In particular, increasingly convincing attempts are made to get tax payers to part with their personal bank details or other personal information for nefarious purposes.
HMRC will never ask for your personal details, particularly your bank or credit card information, by email. Accordingly, if you receive an email requesting this sort of data do not respond.
On their website HMRC confirm that they will never use texts or emails to:
- tell you about a tax rebate or penalty
- ask for personal or payment information
They also advise that you should forward suspicious text messages to 60599 or forward suspicious emails to HMRC’s phishing team at email@example.com.
Business owners may be considering their options for investment in new equipment especially if their trading year end is March, as is often the case. There are a number of considerations:
- Cash flow, can the business afford the cost or fund loan or other financing arrangements?
- Will the new equipment make a positive impact to the bottom line?
- What are the tax breaks?
Points one and two can be accommodated by revising business plans, including cash flow budgets.
The major tax break for qualifying equipment purchases is the Annual Investment Allowance (AIA).
Assets that qualify for AIA include:
- Motorcycles, lorries, trucks and vans.
- Equipment that you buy to use in your business, plant, computer and office equipment etc.
You can’t claim AIA on the purchase of cars, items that have been gifted to your business and items you owned for another reason before you started using them in your business.
From 1 January 2016, the maximum value of capital purchases that you can write off in any period of account is £200,000.
This remains a very generous investment allowance for smaller businesses. Sole traders and partners who are taxed on their business profits at higher rates (40% or 45%) will be eligible to claim a maximum tax reduction of up to £80,000 (at 40%) or £90,000 (at 45%) against their taxable income.
Planning for all of these issues needs to be carefully considered. Apart from the issues we have outlined above the timing of transactions can also be critical. We would be happy to assist. Professional advice is well worth the further investment as the benefits of a well thought out strategy will help you maximise, not only the tax relief available, but also the practical benefits of your new acquisition.
Directors have a responsibility to maintain, preserve and deliver up records that are adequate to explain the financial position of their company. If they fail to do so, they run the risk of being disqualified from acting as a director.
In a recent Insolvency Service investigation, a director was banned for seven years. His transgressions are illuminating. They included:
- He was unable to explain payments taken for his personal benefit amounting to £35,500.
- He was unable to explain the reasons for 83 cheque payments totalling £30,734.
- He authorised payments of almost £100,000 that were made when the company was insolvent, or caused it to become insolvent.
A disqualification order has the effect that without specific permission of a court, a person with a disqualification cannot:
- act as a director of a company
- take part, directly or indirectly, in the promotion, formation or management of a company or limited liability partnership
- be a receiver of a company’s property
Costs that businesses incur to clean up after the recent storms, that affected the north and east coasts in particular, need to meet the usual qualifying criteria that they are incurred “wholly and exclusively” for business purposes in order to be a legitimate write-off for tax purposes.
If the costs are covered by insurance, no tax relief would be due. If costs are discovered to be partially covered by insurance, then only the unrecovered costs would be allowable for tax purposes.
If you have extended your business cover to include loss of profits, you can hopefully recover not only the direct costs of cleaning up but also any profits lost due to the disruption.
There are also a number of tax based risks that are not insured, but directly due to the consequences of being unable to trade after a bad weather incident. For example:
- Facing fines due to late filing of income tax, corporation tax or VAT returns;
- Loss of business accounting records;
- Adverse cash flow, unable to meet tax payments on-time;
HMRC have recently opened a new help line to assist with these consequential tax effects. They would help to:
The helpline is 0800 904 7900. The line is open seven days a week: Monday to Friday 8am to 8pm, and weekends 8am to 4pm. The line will not be open bank holidays.
There are just two months left before the end of the 2016-17 tax year. Those tax payers who have income from business or property sources, and have not yet considered their tax planning options for 2016-17, should do so as soon as possible.
Most tax planning options expire at the end of the tax year. You may lose an opportunity to ensure that you making the most of legislation that is legally available. For example:
- The timing of investments that attract capital allowances, new plant, equipment and commercial vehicles.
- VAT: are you using the most advantageous method to calculate VAT each quarter?
- Is there an opportunity to involve your family in the business?
- Should you take bonuses or dividends before or after the tax year end?
The same considerations will also apply to property owners that have rental income. Additionally, buy-to-let landlords who have borrowed heavily to grow their portfolios should be considering the effects of the gradual reduction in tax relief on their mortgage and finance interest from April 2017.
A review can, and probably should, include a realistic estimate of your various income sources for the tax year. For example, this would enable you to:
- arrive at a realistic estimate of profits for the current financial year,
- make decisions based on this estimate that will benefit your longer term goals,
- take time to consider the effects of the current year’s performance on your business investors, your bank, your staff,
- it will also give you space to consider the ability of your business to sustain your current and future remuneration and withdrawals from your business.
Another word for planning is forethought. If you don’t plan, you are apt to end up considering the reasons why things have not worked out as you expected – you will stare at the open stable door, and the empty stall, and wonder why you never repaired the lock.